If inflation continues to soar, you’re going to have to work like a dog just to live like one. -- George Gobel
Stock markets around the world suffered double-digit losses in the second quarter 2022 thanks to a combination of supply shortages causing inflation and central banks raising interest rates as a result. In the U.S., the S&P 500 index of large company stocks was off -16.10% while the Russell 2000 index of smaller companies fell -17.20% and the technology-oriented NASDAQ 100 index dropped -22.3%. Combined with the losses from the first quarter, the market had its worst first half since 1970.
In a reversal from the recent trend, the biggest companies were the loss leaders. The nine largest companies at the beginning of the quarter had a size-weighted average performance of -25.67% compared to -12.77% for the rest of the S&P 1500 index. Tesla was off -37.5% and Amazon fell -34.8%, both on slowing sales and revenue growth. Other big decliners included NVIDIA (-44.4%), Meta Platforms (the parent of Facebook, -27.5%), Alphabet (the parent company of Google, -21.7%), and Apple (-21.6%).
Inflation remained very high, with the 12-month change in the CPI through May coming in at +8.52%. Oil prices peaked on June 8 ($129.20 for Brent Crude and $121.94 for West Texas Intermediate). The Fed has been extremely aggressive in raising interest rates as a means of combatting inflation; there was a 0.50% increase on May 5 and a 0.75% increase on June 15. But the longer-term bond market anticipated this, and the peak yield for the 10-year note was 3.49% on June 14. By June 30 the yield had fallen to 2.98%.
There were some occasional rays of hope in the stock market. Pharmaceuticals such as Eli Lilly (+13.6%), Merck (+12.0%), and Pfizer (+18.3%) weathered the storm, as did purveyors of food and beverage such as Coca-Cola (+2.6%), PepsiCo (+0.3%), Monster Beverage (+16.0%), General Mills (+12.2%), and Kellogg (+11.5%). The common bonds among these companies are low economic sensitivity and a high degree of pricing power.
Wireless carriers were also relatively successful, including AT&T (+9.0%), T-Mobile (+4.8%) and Verizon (+0.9%). On the other side of the coin, businesses that count on discretionary consumer spending suffered, including Walt Disney Company (-31.2%), Target (-33.0%) and Walmart (-18.0%).
Foreign markets did a little bit better, especially emerging markets (-11.45%) where the MSCI EAFE Index is dominated by China and also includes a number of oil exporters. The MSCI Chinese Index gained 8% in May and June as the government began re-opening the economy after a COVID-related shutdown.
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The Nasdaq 100 is a modified-capitalization weighted stock market index made up of 102 equity securities issued by 101 of the largest non-financial companies listed on the Nasdaq stock exchange.
The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.
The S&P 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The S&P 1500 Index is an unmanaged index of approximately 1500 domestic (U.S.) publicly traded companies whose outstanding common stock shares have a value of at least $850 million and that meet other criteria for liquidity, profitability, and sector diversification as established by Standard & Poor’s. The index represents approximately 90% of the investable U.S. stock market.
The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia, and the Far East, excluding the U.S. and Canada. The Index is available for a number of regions, market segments/sizes and covers approximately 85% of the free float-adjusted market capitalization in each of the 21 countries.
The MSCI China Index measures large and mid-cap representation across China securities listed on the Shanghai and Shenzhen exchanges. The index covers only those securities that are accessible through "Stock Connect". The index is designed for international investors and is calculated using China A Stock Connect listings based on the offshore RMB exchange rate (CNH).